IN THIS CHAPTER
Finding a broker and opening an account
Getting the scoop on those with the scoop — service providers
Tracking your trades with a trading journal
Staying positive to achieve positive results
Swing traders use brokers like any other market participant. What type of broker you choose depends on a number of factors. I break down those factors in this chapter, and I also give you details on how to open a brokerage account.
After you have your account up and running, you need to think about subscribing to certain services to help carry out your analysis. Some services are helpful for screening market opportunities. Other services chart securities and allow you to put price alerts so you receive an email when a certain threshold is reached. Still other services help you locate the cream of the crop by focusing on industry group rotation. I recommend some key services in the pages that follow.
I also cover trading journals in this chapter. To be a keen swing trader, I recommend that you keep a journal of your trades because a journal helps you refine your tactics and improve your trading by allowing you to review what works and what doesn’t.
This chapter assumes you have a working knowledge of the financial markets. You should also know how to use the Internet so you can try out some of the brokerage options and service providers that I mention.
Why is the firm that executes all your trades called a broker? Not exactly an enticing name, is it?
Despite the name, brokers are necessary for swing trading — or any kind of trading, for that matter. But not all brokers are created equal. Some specialize in offering custom advice and wealth-management services for high net-worth individuals (a polite way of saying rich). They charge premium fees to execute trades because of the advice they give their clients.
Swing traders don’t use such plush services. Their brokers have more of a no-frills approach. But the nice thing about competition is that even the no-frills brokers are increasingly offering premium services like check-writing privileges and ATM card access to brokerage accounts.
So how do you pick a broker who suits your needs? Read on.
When choosing a broker, traders all too often focus on a single factor — commissions — to the exclusion of everything else. Commissions are the fees you pay to execute each trade. Commissions get the limelight because they used to be the main impediment to frequent trading.
But not all brokers offer such competitive rates, nor do they all provide the same services, so you must carefully consider the factors that are most important to you when settling on a broker. Some of those factors include the broker’s charting system, the access to international public equities, customer service, the mobile app, the ease of placing orders, and the ease of depositing and withdrawing money.
What broker you choose depends on which services you want and how much you’re willing to spend on commissions. Here are two classes of brokers to consider:
You may also encounter full service brokers who hold their clients’ hands, offer a suite of services, and charge hefty commissions. Obviously, full service brokers aren’t the choice of swing traders. A swing trader who needs someone else’s advice on what to trade shouldn’t be in the business of swing trading. Swing trading is about independence, not dependence.
As a swing trader, you must use either a discount broker or a direct access firm (see the preceding section for details on both). I’m not going to recommend a particular broker for the simple reason that broker rankings change over time, and a broker that provides great service today may not necessarily provide such service in the future.
The major discount brokers you may want to consider include
Many of the discount brokers have started to offer direct access trading, so there is increasingly an overlap between the two segments. Some of the larger and well-known direct access trading firms you may want to consider include
You need to consider a number of factors before choosing a broker:
Commission rate: Don’t pay more than a $7 flat fee, or more than one to two cents per share for your trades. Trading with commission rates higher than this amount isn’t necessary given what you can get from existing brokers. And, more important, the higher the commission rate, the higher your returns have to be to cover the cost of those commissions.
Although I recommend specific rates in the preceding paragraph, traders tend to put too much emphasis on the commission rate and sometimes neglect other details when choosing a broker. Don’t fall into that trap. The commission rate is important, but it’s not the sole factor you should consider.
Customer service: You want to know that you can get someone on the phone — and fast — when you have a trade or problem. How responsive a company is to your complaints is next to impossible to determine without opening an account — unless you use media rankings. I recommend relying in part on such rankings because they can be instructive — the writers share their experiences with a broker’s customer service and other issues. Barron’s and Kiplinger are two publications that print broker rankings.
After you’ve settled on a broker, you need to decide what kind of account you want to open. You have several options, depending on whether you plan to
The next two sections help you answer these questions (except the spouse question … that’s a discussion you need to have with your significant other).
After selecting your broker, you need to choose between opening a cash account or opening a margin account. Cash accounts restrict your investable assets to the cash available in your account. Margin accounts allow you to borrow money from your broker to execute trades. A swing trader with $50,000 in cash sitting in a margin account can usually borrow $50,000 to trade.
Borrowing is a double-edged sword: It magnifies potential returns but also magnifies potential losses. If you borrow 100 percent of your assets and invest the entire amount (for example, you deposit $50,000 into your brokerage account and trade $100,000 in securities), a 10 percent loss is magnified to a 20 percent loss. Not pretty. The broker will also charge you fees to use any borrowed money.
Another question to ask yourself is whether you want to open a traditional brokerage account or a retirement account.
No one is an island, and no swing trader can trade without service providers. But not all service providers are created equal.
Service providers differ in terms of the quality, timeliness, and breadth of the data they supply, among other items. What you want in a provider is some type of service — charting or access to a database of fundamental data, for instance — that you can use for your benefit. In the following pages, I tell you what to look for and what to avoid.
Data providers simply provide you with the tools for finding and charting securities and increasing your market intelligence. These tools should be flexible enough to allow you to change inputs, such as what indicators to use for a chart or what criteria to screen for in a database. I classify service providers broadly into those that supply technical data and those that supply fundamental data.
Every swing trader must have a strong charting system. That charting system must incorporate real-time charting and quotes (charts and quotes that reflect live market data and aren’t delayed). If you enter orders after the markets close, you don’t need a real-time charting service, but most swing traders enter orders during market hours to achieve best price execution.
The marketplace has many charting providers. Most discount brokers catering to the active trader club offer charting systems, and order entry is often integrated with the charting functions (that is, you can program automatic buys or sells when a certain action occurs in the chart).
Some of the popular charting programs in the marketplace include
https://stockcharts.com) A free resource though premium features require payment.
Several of these charting systems are integrated with brokers to allow for easy order entry.
I use two charting systems: the one provided by my broker and another one in which I conduct much of my own research.
Swing traders who opt to use fundamental analysis in their investment process need to subscribe to data providers that can assist them in their research. Fortunately, much of the fundamental data on a company —historical earnings, returns on capital, expected growth, and the like — is available for free on the Internet.
Yahoo! Finance, Google Finance, and Reuters can address many of your fundamental data needs. And all three services provide fundamental data for free. Following are a few more details on all three services:
http://finance.yahoo.com): I often begin my fundamental data search at Yahoo! Finance. The website offers basic charting; headlines on a selected security; a company profile; competitor information; analysts’ estimates (and historical earnings surprises); and financial data from a company’s balance sheet, income statement, and cash flow statement. Yahoo! also has impressive coverage of international stocks.
http://finance.google.com): Google also offers fundamental data on stocks, although the coverage isn’t as comprehensive as Yahoo! I use Google more often when I want to find articles on a company using the news search feature from the main Google website.
www.reuters.com/markets/stocks): Yahoo! Finance and Google simply present data taken from other providers, but Reuters supplies its own data. You can look up any stock in the search box (international coverage is excellent) and the landing page for each stock includes Overview, News, Key Developments, People, Charts, Financials, Analysts, and Research. Reuters also supplies a Stock Screener to find trade ideas. The database boasts a universe of more than 100,000 stocks. My favorite section of the Reuters website is the Financials section of a company shown in Figure 3-1. At a glance, Reuters provides historical earnings and sales growth, expected growth rates, valuation tables, profitability measures, and financial statement data. It’s difficult to beat such a comprehensive look at a single company on one page.
In addition to these free research services, a few paid subscriptions are worth your money:
www.investors.com/): This daily newspaper provides fundamental data on thousands of stocks. IBD provides a significant info on each company, such as a relative strength ranking (a technical measure), an earnings ranking (a fundamental ranking number), a group rank (a measure of the strength of a company’s industry group), and other fundamental and technical measures. IBD also offers screening services for an additional fee. (Refer to the Appendix for more information about IBD.)
www.highgrowthstock.com/): This software program, also known as HGSI, provides top-down and bottom-up data services, combining fundamental and technical data. The software is ideal for fundamentals-based traders who screen sectors or the overall market for trading candidates.
www.zacks.com): Many of Zacks’s screening tools are available online for free at
www.zacks.com/screening/custom. Certain data fields are available only to subscribers, but you can build effective screens without a subscription. However, if you want to backtest a screen to see how it would’ve performed historically, you must subscribe to Zacks Premium Screener. Note that Zacks is useful for U.S. stocks. If you want international coverage, use Reuters.
If a service provider is charging exorbitant fees for its services, beware. You can usually purchase quality charting programs for a small monthly fee, and sometimes you can get them for free from your broker (assuming you trade often enough with that broker). Although many free charting programs are available online, remember that you need to be using real-time charts or charts that update instantaneously and aren’t delayed 15 or 20 minutes. Free charts are fine for after-market analysis, but you can’t rely on them for real-time trading.
Don’t get advice for stocks from the general public (via Reddit or Twitter) or software programs that issue specific buy or sell recommendations. Both of these services effectively delegate some thinking on the part of the swing trader to someone else.
If you find yourself browsing Twitter feeds, Reddit threads, or message boards for analysis of stocks, you may as well wear a sign on your back that reads, “I’m lost.” My advice: Avoid seeking advice from these sites because they won’t give you good intelligence and are likely to mislead you. Here’s why:
The information on these sites isn’t objective. Generally, the sentiment on Twitter or reddit is bullish. The majority of people posting are excited about a company’s prospects and rave about how the widget the company makes will revolutionize the world. Some people list their target prices and how they recently picked up “another” $10,000 worth of said stock. I’m sure they wouldn’t deceive us. (For an example of this sometimes irrationally bullish outlook, see Figure 3-2.)
Message boards are flooded with rumors and inaccuracies. Don’t waste your time (or money) on them.
Many intelligent market experts out there write financial newsletters. Newsletters tend to be of a higher caliber than Twitter or Reddit threads. Whereas a newsletter is free to post online, newsletter writers depend on subscribers to continue their service. Hence, it’s tougher to make up things when you may lose business as a result.
What I have a problem with are newsletters that recommend you buy or sell this or that stock. As a swing trader, you must be independent. You aren’t supposed to rely on anyone else’s expertise. Newsletters that stick to the macro picture or industry group analysis are fine. You learn by reading those newsletters.
But don’t think for a second that you have an edge in the market if you’re simply replicating the buys and sells that a newsletter recommends. Even when the newsletter has a good track record, you shouldn’t follow the recommendations blindly. You’d be better off giving your money to a professional manager.
Any system needs some type of feedback loop to improve itself. For example, employees of most companies must complete annual performance reviews, when their boss sits them down and tells them what they’ve done well (something? anything?) and what they can improve on.
Your progress as a swing trader is no different. A feedback loop is crucial so you can make adjustments and improvements. Insanity was once defined as doing the same thing over and over and expecting a different outcome each time. If you trade securities without a feedback loop, I view that as a type of insanity.
Your feedback loop should take the form of a trading journal in which you record all your trades. The journal entries should be short and combine text that outlines the basics of the trade (like how you found it and what triggered the entry) and charts that show what you saw before entering the trade (which help you spot the readings of technical indicators, where resistance and support levels were, and so on).
After a position closes (meaning you exit for a profit or loss), you can return to the journal entry to discover what you did right or wrong. You may be surprised at what you uncover. You may find that you should have let profits ride longer, for example, or taken losses faster. Or you may realize that the nine-day moving average isn’t such a great tool for signaling the beginning of an uptrend or that another indicator consistently generates profits for you.
Look for commonalities between your winners and losers after you’ve kept your journal for a few months. If you’re like me, you may learn more from your losses than you do from your gains. When you suffer a large loss, it can be helpful to know whether the problem was due to the system itself or your failure to follow the system. Then, if warranted, you can alter your trading plan to improve the odds of success.
A trading journal can, of course, include a lot more information than what I’ve presented here. For example, I don’t include certain items in a journal entry, such as position size, that you can easily obtain from your broker. You can also plot the industry group of the security, if applicable, or a chart of the overall market at that time of purchase. But the problem I’ve found with including too much information is that you may find it a chore to keep the journal, which may lead you to abandon it entirely.
The final element you need to get started is a winning mindset. When I first heard this rule of thumb, I thought it was too touchy-feely. But experience and research studies have shown that there’s something to it. Fitness experts often focus on a person’s mindset because they know that beliefs are translated into action. When your mind believes something, it works to make that belief a reality.
Bill Phillips, in his book Body for Life, recounts an intriguing story about beliefs and goal-setting. He refers to a Harvard University study that showed that only 3 percent of the students graduating in 1953 actually wrote down their specific career goals. Twenty years later, the study’s researchers interviewed the class of 1953 and discovered that those 3 percent who had written down their goals were worth more than the other 97 percent combined.
It helps to set specific goals, like “I will return 15 percent this year.” Write down your goal and read it often. Yes, I know it sounds corny, but I’ve seen this advice time and time again in investment books, physical fitness books, and other places. And I’ve seen it work.
So begin swing trading with a winning mindset. Know that you’re going to achieve your goals. Be optimistic. Take losses in stride and stay as unemotional as you can. You’ll find that a winning mindset helps you become a successful swing trader.